Startups Steer Clear of Big Tech by Innovating for Business
THE BUSINESS TIMES
By Steve Lohr and Erin Griffith
Entrepreneurs, engineers and venture investors are shying away from the consumer Internet, and turning more to the seemingly ho-hum realm of supplying software to business, or so-called enterprise technology. Venture funding for social media startups reached a peak of US$3.9 billion in 2011. But by 2018, it had fallen to US$400 million, according to Pitchbook, which tracks venture deals. Over the same years, venture backing for startups supplying software to businesses more than tripled, to US$2.8 billion.
That overall trend - less a sudden surge than a steady migration — is a subject of scrutiny today as federal agencies, states and Congress investigate whether the country's largest tech companies violate antitrust laws. With Facebook, some of the officials are looking into whether the company bought some emerging competitors to protect its dominant position in the market for social networks.
Is the movement of money and talent simply a natural shift from a mature market to one with greater opportunity? Or is the consumer internet dominated by a few behemoths whose size and aggressive tactics have created "kill zones" around them, deterring startups and investors, stifling competition?
Facebook and Google do loom large in the consumer market, discouraging entrepreneurs from trying ventures in the giants' ever-expanding corporate paths.
Yet evolving technology — cloud computing and machine-learning software - has also opened a lucrative market in business.
"Public policy should pay attention to this," said Fiona Scott Morton, an economist at the Yale University School of Management and a former senior official in the Justice Department's antitrust division. "It's important to see which way the money and people are moving, and why."
A decade ago, about half the startups that went to Accel, a venture capital firm in Silicon Valley, pitched consumer ideas, said John Locke, an investor at the firm. Today, the consumer-focused pitches have dropped to about 30 per cent.
At Amplify Partners, more than 40 per cent of the 67 investments that the firm has made in business-focused startups are companies whose founders have consumer Internet backgrounds, said Sunil Dhaliwal, a general partner there.
David Ulevitch, a general partner at Andreessen Horowitz, a large venture firm, said it was increasingly looking to enterprise startups and had invested in several. "The consumer landscape is incredibly difficult, so the consumer world is shifting to the enterprise," he said.
Startups are increasingly writing software that allows mainstream companies to do things that the consumer Internet giants pioneered, such as constant online monitoring of how people use products, regular updates and personalization. In addition, as banks, manufacturers, hospitals and others struggle to make sense of their digital data from the Web, online forms and sensors, they need the help of tech companies.
Tandem
When Rajiv Ayyangar and two other Yahoo alumni explored startup ideas, they experimented with concepts directed at the public, such as a personal finance app. But making money from consumers was too daunting, they concluded, partly because of the tight grip that digital giants such as Google and Apple had over distribution.
So instead, their San Francisco startup, Tandem, founded last year, made a product for the business market, a virtual office for remote teams. "The bar is a lot higher in consumer, so we went to the enterprise side," said Mr Ayyangar, Tandem's chief executive.
Gremlin
"The problems we were facing, everyone else is facing now," said Kolton Andrus, chief executive of Gremlin, which offers programming tools to make Internet-style cloud applications more reliable. Mr Andrus helped found the company in 2016, after seven years as a senior engineer at Netflix and Amazon.
Some startups are breathing new life into old categories of business software.
Superhuman
Superhuman, an e-mail service founded in 2014, is growing rapidly, offering fast, engaging and personalized service.
The startup migrants from the consumer Internet are often engineers. Their stories vary, and their motivations are nuanced. But they are all entrepreneurs fully engaged in pursuing opportunity, which they see in the enterprise marketplace, a door far more open than on the consumer side, for whatever reasons.
Justworks
Isaac Oates was an engineer at Amazon and Yahoo, before his ad tech startup was acquired by Etsy, an e-commerce seller, where he worked for three years. In 2012, he co-founded Justworks, a supplier of cloud-based payroll and human resources software for small businesses, having experienced that need firsthand in his earlier startup and heard the same from other entrepreneurs. "We have a team that came from the consumer Internet, and we apply what we learned there to what we do now," said Mr. Oates, the chief executive.
Justworks, based in New York, now has 80,000 people using its service, mostly at small businesses (15 people is the average) paying monthly subscriptions. The company employs 600 people and has raised US$93 million.
Honeycomb.io
In 2013, Facebook acquired a maker of software tools for mobile apps where Charity Majors was a senior engineer. She worked at Facebook for about three years, before departing to become a co-founder of Honeycomb, a San Francisco startup, in 2016.
For years, Ms. Majors said, she had adopted the engineer's neutral mindset - she wrote code, and others decided how it was used. But especially at Facebook, with its model of harvesting personal data for ads, she increasingly had second thoughts. "My career has been an escalating real-world lesson that I did care about what the technology was used for," she said.
Honeycomb, she added, is trying to democratize and simplify modern programming with "consumer-quality" software monitoring and debugging tools.
Honeycomb is a part of the investment portfolio of Merian Ventures, a venture firm founded by Alexsis de Raadt St. James that invests in women-founded and co-founded tech innovation in the US and UK.